By Brad Dorfman - Analysis
CHICAGO (Reuters) - The possible bankruptcy of lender CIT Group Inc comes at a bad time for manufacturers of clothing, shoes and other goods sold by retailers as they gear up for their busiest times of the year.
The timing is “terrible,” said Al Ferrara, partner in retail and consumer products business of consulting firm BDO Seidman LLC. “Retailers now are basically gearing up for the back-to-school and the fall season.”
CIT, which lends to hundreds of thousands of small and mid-sized U.S. businesses, said late Wednesday that government bailout talks had ended, a move that could set the stage for bankruptcy.
For the retail industry, CIT’s key function is as a factor, buying receivables -- or the right to receive money owed by retailers -- from suppliers at a discount so that those suppliers continue to have working capital. CIT gets paid back when the retailers sell the goods, typically in 60 to 90 days.
“CIT is one of the very few large, sophisticated factors out there for retail suppliers,” said Mallory Duncan, general counsel for the National Retail Federation, an industry trade group. “If you remove CIT, then an awful lot of suppliers do not have access to the operating cash they need to supply the next round of goods to retailers.”
The American Apparel & Footwear Association estimates that about 60 percent of the industry’s factoring is done by CIT.
While it would never be a good time for suppliers to lose that capital, the winter holiday season tends to be the largest selling season for retailers, with back-to-school the next biggest, so the disruption of credit comes at a bad time.
“TURNING TO PANIC”
Suppliers could be particularly hurt right now by a CIT failure because they need letters of credit for their manufacturers to line up the shipments they will need for the fall selling season, according to Stephen Gray, a managing partner at restructuring advisers CRG Partners.
“If they don’t make deliveries to these large retailers on time and complete, then sometimes they’ll just turn down the shipments and other times hit them with massive penalties,” Gray said.
Jerry Reisman, a partner at law firm of Reisman, Peirez and Reisman, said many suppliers could also have to file for bankruptcy protection if CIT is no longer able to provide financing.
“I continue to be deluged by calls from apparel companies but the calls are now turning to panic,” Reisman said in a statement.
Susquehanna analyst Christopher Svezia said that for apparel and footwear vendors, “generally speaking, those companies have to go out and get credit ... it will certainly be tough negotiations. I think the pool has definitely contracted and I think the flexibility and the terms have gotten more challenging.”
Other banks and lending sources could eventually step in to take up the factoring slack from CIT, Ferrara said, but in this recession, with credit tight, “banks have not been in the mode of moving quickly to get deals done.”
NRF’s Duncan also notes that CIT has developed expertise over decades for lending money to secure retailer inventories.
“That experience isn’t easily and quickly acquired or transferred to somebody else,” Duncan said.
Most large suppliers and retailers have access to other financing and will not be hit hard by a CIT bankruptcy, analysts said.
“While any CIT bankruptcy would be a negative event causing job loss, tougher credit, and depressed sentiment, our conversations with management (department store and vendors) point toward limited direct liquidity risks stemming from CIT,” Goldman Sachs analyst Adrianne Shapira said in a research note.
J.C. Penney Co Inc, Macy’s Inc and Kohl’s Corp have said that about 10 percent of their payables are factored through CIT, Shapira said.
She said that large manufacturers like Jones Apparel Group Inc could gain market share if smaller competitors go out of business because of CIT.
Larger companies could also by smaller ones that cannot get financing due to CIT’s problems.
“Companies that might not otherwise have been available, but if they run into financing issues because of the CIT situation, that could be another acquisition target for us,” Edward Rosenfeld, CEO of footwear maker Steven Madden Ltd, said.
Additional reporting by Caroline Humer in New York and Dhanya Skariachan and Nivedita Bhattacharjee in Bangalore; Editing by Phil Berlowitz and Richard Chang